The Growing Marketing Inequality In Financial Planning Firms

Executive Summary

Given that the core of financial planning is the delivery of personalized, customized financial advice, there have always been limited benefits of scale for financial advisory firms; no matter how good the technology, operations, and staff support, advisors only have so many hours available and so much mental “bandwidth” to serve clients, ultimately limiting the scalability of an advisory firm.

Yet while advice itself may not be conducive to scale, the marketing of financial advice certainly is. In fact, recent industry studies are beginning to show that larger firms seem to be driving more referrals than smaller ones, and many of the largest advisory firms are generating a huge volume of new clients by leveraging the value of relatively few dedicated full-time marketing staff.

Accordingly, this suggests the environment for smaller advisory firms may become increasingly challenged, as the larger firms grow larger while the smaller firms remain “stuck” small, unable to reinvest enough into marketing the practice to accelerate its own growth. While this may not be the end of small firms and solo practitioners, it will make such firms increasingly reliant on scalable marketing strategies (e.g., social media) or focused niche markets to carve out a space where they can remain differentiated and truly competitive.

The Emerging Benefits Of Scale

For many years, there has been a question of whether financial advisory firms can really scale effectively. After all, the greatest cost for virtually all advisory firms are the professional staff members, and there are only so many hours in the day/week/month/year to meet with clients who have complex problems that take time to analyze and evaluate, and towards which solutions can be crafted. Certainly technology can help improve efficiencies at the margin, and bring down the number of hours it takes to construct a plan and craft recommendations, and adding junior staff can help distribute the workload at a lower cost as well. But there’s only so much efficiency to be wrought from the process of an in-depth analysis of an individual’s specific needs, goals, and circumstances, and developing customized solutions. And beyond that, the reality is that in a deep-relationship-based business like financial planning, the brain of even a highly efficient planner may simply be incapable of handling more than about 150 total deep relationships, regardless of the technology tools available to leverage.

Yet as the ranks of large advisory firms continue to grow larger, another list of “scale” benefits are emerging. While the delivery of in-person advice from advisors doesn’t scale very much, and operations is only slightly better (between technology and staff efficiencies and the size to negotiate more aggressively for the cost of platforms and service providers), other staff positions that simply don’t exist at smaller firms begin to appear within larger firms that have scale. Large firms have the opportunity to hire dedicated staff to be responsible for technology implementation and innovation in the firm, to hire dedicated staff responsible for the training and career development of all employees, and perhaps most importantly, larger firms have the opportunity to hire dedicated marketing staff.

The Scale Of Marketing

The capacity of larger firms to hire dedicated marketing staff affords a greater consistency in the firm’s marketing process and effort. The firm’s marketing story and key differentiators can be refined in a world where many firms are experiencing a crisis of differentiation. Marketing collateral and website materials can be updated. Content and inbound marketing strategies can be executed more effectively by leveraging internal staff resources to create the content itself. Efforts for marketing events with clients and prospects shifts from operations staff (who may be able to execute, but don’t necessarily understand marketing) to being spearheaded by someone who actually understands how to conduct a firmwide marketing effort. A consistent process can be crafted and executed for handling new client inquiries, cultivating relationships with centers of influence, expressing gratitude to referral sources, and more.

Consistent execution of a marketing strategy in turn builds trust and credibility, as the firm increasingly differentiates itself from the smaller firms it may compete against. Or viewed another way, larger firms begin to have more referrals and higher close rates, simply because the firm is perceived as being more credible, with the investment into marketing staff to help cultivate that message. In fact, the latest Schwab RIA Benchmarking survey found that the top advisory firms generate 3-5 times as many referrals from clients and centers of influence, and that the referral numbers were larger for bigger firms than smaller ones. In addition, larger firms convey a certain permanence and continuity of client service that may be increasingly appealing to prospective clients (at least, until/unless the firms grow so large that clients no longer feel a personal connection to the firm and the advisor!).

Another way that larger firms scale their marketing is to better leverage their public relations efforts. For instance, while most advisors may struggle to fill a marketing event with prospective clients, Edelman Financial Services can leverage the visibility of Ric Edelman’s books, radio show, and television presence to connect with a huge number of people at once who might do business with the firm. Similarly, Buckingham Asset Management leverages the exposure of several media personalities it has under its umbrella, including Larry Swedroe, Carl Richards, and Dan Solin. In a world where many advisors barely have the time to take a call from a reporter, and certainly don’t have the time to engage in outbound efforts to craft a relationship with multiple reporters, a larger firm with dedicated marketing staff can engage in an ongoing public relations strategy to drive a material volume of prospective clients to the firm.

Implications For The Future – Will The Small Be Stuck Small?

The scalability of marketing for advisory firms presents a troubling issue – will small firms be “stuck” small as larger firms find the scale to ramp up their marketing efforts and grow larger?

On the other hand, as many firms have discovered, the benefits of gaining scale with size also turns into a tremendous burden to truly use that scale to maintain effective growth. After all, a firm with $10M of AUM and 8 clients only needs 1-2 more clients all year to grow at 15%; a firm with $100M of AUM and 80 clients needs one new client per month to maintain a 15% growth yet. Yet a firm with $1B of AUM and 800 clients needs more than two new clients per week to achieve that same 15% growth rate. Generating that kind of high-volume growth means the firm absolutely must be able to leverage its new client acquisition process from its marketing scale, or it may fail to maintain the 15% growth rate necessary to provide the kinds of opportunities necessary to attract and retain the best talent.

How far will this trend extend? It’s not entirely clear. While larger independent firms are growing bigger and bigger, most are still relatively small businesses in the grand scheme of things. After all, Mark Hurley – who has long predicted that the industry will trend towards significant consolidation – predicts a handful of “mega” firms with $75 to $150 million in revenue, yet this is still a pittance compared to the big-4 accounting firms that have more than $20 billion of annual revenue amongst them. In other words, even if a few large firms grow “huge” by financial advisory industry measures, their market penetration will likely still be very tiny relative to the size of the entire marketplace of potential clients, with plenty of room for firms of all sizes to grow.

Nonetheless, the fact remains that in a business that is otherwise difficult to grow, marketing is a function that is especially conducive to scale, and may lead to an increasing concentration of growth as larger firms get larger and a more challenging marketplace for smaller firms that may find themselves “stuck” small, especially as larger firms also benefit from being able to offer more training and career tracks for new advisors (not to mention the opportunity to use the firm’s scaled marketing for the advisor’s own growth!). For large firms, this may represent both an opportunity for growth, and a necessary investment to maintain growth rates. For smaller firms, it will be increasingly crucial to recognize the changing landscape for client competition, and what is necessary to grow from here, or we may see an environment where the large firms continue to grow larger, while the small remain “stuck” small.

Related

I’ve found over the years, that “an empire” of your choosing is not always big. Smaller FA firms, including solo-preneur and micro-firms do very well hiring part-time assistance either hiring staff part-time or hiring consultants to help them market their companies. Then over time, what I’ve seen happen is that they’re hired for more and more hours until a full time person is needed.
The emergence, especially over the last 3-5 years, of small businesses whose product is marketing for financial advisors has been growing. From web designers, to writers, to social media experts, etc. They are all there for the smaller firms to hire.

Maria,
No question the explosion of outsourcing marketing options over the past few years has been a part of this trend, and I definitely view that as a plus.

It doesn’t change the point that larger firms often have the scale for even greater and more leveraged investments into their marketing, but without a doubt the opportunity for outsourced marketing help (without needing to hire a full-time marketing staff member) gives a nice opportunity for some assistance for a smaller firm to help stay competitive (though notably, the advice from many marketing consultants to such firms is to implement exactly what’s discussed here, which is to focus in more clearly on a niche where the small firm can establish a dominant presence).

To add, the situation where larger firms can hire more people, etc. isn’t new. I remember a time, in the 1970’s when Bear Stearns was so small (under 300 people) that we didn’t have a Purchasing Manager, let alone a Marketing Department.

David Jacobs

From the article you reference, the top big firms got 11% of revenue growth from referrals, and the small average firm got 3.1%. If the top big firm is growing AUM by 15% a year, that means the small average firm is growing AUM by around 14%. This is NOT what is going to break the small guy.

To me, more telling from the article was this fact “firms with at least $1 billion in assets had 51% greater revenue per client than firms managing $250 million to $500 million, and operated at a 25% greater margin. Those larger firms also managed 71% more assets per professional than their smaller counterparts”

David,
May be worth digging further into here, but I’m pretty sure the article is misquoting the study. It’s not that 11% of net flows were from referrals, I think it was that net flows from referrals were equal to 11% of revenue (i.e., it was 11% net flows relative to the whole pie, not 11% of the subset of net flows were from referrals). I’ll try to dig this up to clarify.

Great post Michael, I enjoy reading these and you’re on top of an emerging trend. I would lump “communications” (client and external) into this range as well. There are two specific areas where this trend is exposed even further – advisor movement (changing BD/custodians, etc) where marketing/PR isn’t on the radar during a transition (but it should be) and advisors looking to their product sponsor friends for help outside of your typical seminar/golf/restaurant with clients spend. Hope we can keep in touch on this as my firm is working on several solutions for both small and large advisors.-Kevin Dinino

Michael, you outlined the problem very well and we have discussed it with many of our clients. In our opinion advisors will (and should) use ‘robo’ technology differently from the Wealthfronts of the world. They should not count on any users converting onto those platforms from their website, it simply won’t happen. Instead, a ‘robo’ platform like our BioniX serves two functions.
1. It allows advisors to keep and even actively sell clients who are not able to pay the full fee now. For example, what about children and nephews of your loyal clients? Instead of ignoring them and hoping they eventually come to you, you can actively solicit your loyal clients to bring them onto your ‘robo’ platform at a lower level of service (like a quarterly phone call and some tax advice for a few $100’s per year). This can be an efficient way to generate extra revenue and fill your pipeline for the future. This method can also work in advising on a huge 401K market that is out there.
2. A ‘robo’ platform for advisors will serve as a client portal on advisor website with a login that will contain on-demand information that more and more investors now require.

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.